Comment: Answers to Often-Asked Year-2000 Questions

Dec. 3 is an important date under the Year-2000 Information and Readiness Disclosure Act of 1998.

That is the last day companies may designate previously made year-2000 statements as "year-2000 readiness disclosures" and avail themselves of the special-but limited-legal protection the act gives to those disclosures.

What follows are some of the frequently asked questions concerning the treatment of year-2000 readiness disclosures under the act and the requirements for designating prior year-2000 statements as year-2000 readiness disclosures.

What is the difference under the act between a "year-2000 statement" and a "year-2000 readiness disclosure"?

Year-2000 readiness disclosures are a subset of the broader category of communications defined as year-2000 statements. The act defines a year-2000 statement to include virtually any communication, whether oral or written, that relates directly or indirectly to some aspect of the year-2000 problem or to the year-2000 processing capabilities, products, or services of any entity.

In contrast, a "year-2000 readiness disclosure" is an authorized year- 2000 statement made in writing (or in readable electronic form), which is clearly identified as a year-2000 readiness disclosure and which concerns the year-2000 processing capabilities of the company making the statement or the year-2000 processing capabilities of that company's products or services.

What year-2000 statements are eligible for retroactive designation under the act as year-2000 readiness disclosures?

A year-2000 statement made by a party after Jan. 1, 1996, and before Oct. 19, 1998, when the law was enacted, may be designated a year-2000 readiness disclosure if at the time the statement was made it complied with the requirements of a year-2000 readiness disclosure described above, apart from the labeling requirement.

Thus, a party's authorized written year-2000 statements made during that period concerning that party's own year-2000 processing capabilities, products, or services would be eligible for retroactive designation as year-2000 readiness disclosures.

What must be done to designate a previously made year-2000 statement as a year-2000 readiness disclosure?

A notice of designation must be given on or before Dec. 3, 1998. The act requires the notice to state that the year-2000 statement that is the subject of the notice is being designated a year-2000 readiness disclosure and to include a copy of the statement with a legend labeling it as a "Year-2000 Readiness Disclosure." Thus, it is necessary to repeat the original year-2000 statement in order for the designation to be effective.

Since the act permits year-2000 statements made as early as January 1996 to be designated as year-2000 readiness disclosures, it is quite likely that those previous statements, while accurate at the time they were made, are no longer accurate because of subsequent developments.

In those cases, consideration should be given to including appropriate language in the designation notice that points out the date the year-2000 statement was originally made and the fact that the statement contains information that is no longer current.

In addition, consideration should be given to issuing a further year- 2000 readiness disclosure that provides current readiness information.

In what ways may a notice of designation be given under the act?

The act permits a notice of designation to be given in two ways. First, individual notice may be given on or before Dec. 3 to all recipients of the earlier year-2000 statement. The act does not prescribe the way in which individual notice is to be given, as long as it is in writing or readable electronic form and contains the required contents.

Individual notice by mail, fax, or e-mail would appear to be acceptable methods of providing such notice.

This method of giving notice generally applies to situations in which the prior year-2000 statement was sent to identifiable recipients. The burden and feasibility of providing individual notice in each case will likely depend on the number of recipients involved and on the existence of records to identify those recipients.

A second method of giving notice is available to those parties that maintain a Web site for posting their year-2000 statements. The act allows such parties to satisfy the notice requirement by prominently posting the notice of designation on their year-2000 Web site for a period of at least 45 consecutive days beginning no later than Dec. 3.

The act further requires that the notice of designation be provided using the same method that was used originally to disseminate the statement.

This additional notice requirement effectively limits the utility of Internet notices to instances in which the original year-2000 statement was not sent to individual recipients, but rather disseminated to the public at large, such as by posting on a Web site.

Can objections be made to the notice of designation?

Yes, but the objection will be effective only upon a strong showing of prejudice.

An objection to a proposed designation must be served on the designating company within 45 days after receipt of notice if the objector received individual notice, or within 180 days after enactment of the act (April 19, 1999) if the notice was posted on a Web site.

The act further requires that the objecting party prove by clear and convincing evidence that it relied on the year-2000 statement before receipt of the notice and that it would be prejudiced by the retroactive designation of that statement as a year-2000 readiness disclosure.

Only if the objector gives timely notice and makes the required showing of reliance and prejudice would the designation be ineffective and, even then, only as to that objector.

What legal protection is given under the act to year-2000 statements that are retroactively designated as year-2000 readiness disclosures?

Retroactively designated year-2000 readiness disclosures are entitled to the benefit of the evidence-exclusion rule of section 4(a) of the act to the same extent as readiness disclosures issued after the enactment date of the act.

This means that, except as to certain kinds of contract claims, a good- faith readiness disclosure may not be used against a company to prove the truth or accuracy of any year-2000 statement contained in that disclosure.

This exclusion applies only to situations in which the year-2000 statements contained in a readiness disclosure are offered against the maker for the truthfulness of those statements. The exclusion does not bar the use of the readiness disclosure for any other purpose, including as evidence to show that the maker made untrue or inaccurate year-2000 statements in its readiness disclosure.

The value of this exclusionary rule is difficult to assess. It is designed to protect parties that have truthfully acknowledged existing or potential year-2000 problems in their readiness disclosures by preventing those disclosures from being used against them as "admissions."

This may be of particular benefit in tort actions based on some year- 2000 processing failure, if the defendant had acknowledged the risk of that failure in a readiness disclosure.

But the act does permit readiness disclosures to be used against the maker in contract actions that are based on claims for anticipatory breach, repudiation of contract, or similar contract claims.

Does the exclusionary rule for year-2000 readiness disclosures apply to readiness disclosures contained in materials filed with the Securities and Exchange Commission or with bank regulators?

Yes, but only to a limited extent.

The evidentiary protection accorded year-2000 readiness disclosures does not apply to proceedings brought by the SEC or other government entity in an enforcement or regulatory capacity. Likewise, that evidentiary protection does not apply in civil actions, including private actions, brought under the federal securities laws.

However, in other covered actions not brought under the federal securities laws, a readiness disclosure contained in an SEC or bank regulatory filing would be subject to the evidence-exclusion rule of section 4(a) of the act.

Are all retroactively designated year-2000 readiness disclosures entitled to the liability limitations of section 4(b) of the act?

No. The liability limitations apply only to year-2000 statements made after July 14, 1998. In the case of retroactively designated readiness disclosures, the liability limitations of section 4(b) apply only if the original year-2000 statement was made after July 14, 1998, and before Oct. 19.

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